<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------- ------------
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
(Exact name of Registrant as specified in its charter)
Delaware 59-2646820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(Address of principal executive offices)
(954) 458-7636
(Registrant's telephone number, including area code)
----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.00001
per share as of May 12, 1998 was 291,972,928.
<PAGE> 2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements.................................................... 1
Consolidated Condensed Balance Sheets,
March 31, 1998 and December 31, 1997............................ 1
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 and
from Inception (February 20, 1984) to March 31, 1998 ........... 2
Consolidated Condensed Statements of Stockholders' Equity
from Inception (February 20, 1984) to March 31, 1998 ........... 3
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 and from
Inception (February 20, 1984) to March 31, 1998 ................ 10
Notes to Consolidated Condensed Financial Statements ............... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 22
PART II
Item 1. Legal Proceedings....................................................... 28
Item 2. Changes in Securities and Use of Proceeds............................... 28
Item 3. Defaults Upon Senior Securities......................................... 29
Item 4. Submission of Matters to Vote of Security Holders....................... 29
Item 5. Other Information....................................................... 29
Item 6. Exhibits And Reports on Form 8-K........................................ 29
SIGNATURES ........................................................................... 30
</TABLE>
<PAGE> 3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
March 31, Statements
1998 December 31,
(Unaudited) 1997
----------- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,735,681 $ 236,059
Investments 566,000 2,984,902
Inventory 19,729 19,729
Other current assets 29,984 20,240
------------ ------------
Total current assets 2,351,394 3,260,930
Property and Equipment 578,757 485,661
Other Assets 322,907 443,251
------------ ------------
Total assets $ 3,253,058 $ 4,189,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 268,243 $ 375,606
------------ ------------
Total current liabilities 268,243 375,606
------------ ------------
Convertible Debenture, Net 618,043 2,384,793
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares
of $.00001 par value authorized,
290,271,443 and 277,962,574
shares issued and outstanding 2,902 2,779
Additional paid-in capital 12,533,044 10,512,767
Subscription receivable (19,000) (19,000)
Deficit accumulated during the development stage (10,091,104) (8,993,266)
Deferred compensation cost (59,070) (73,837)
------------ ------------
Total stockholders' equity 2,366,772 1,429,443
------------ ------------
Total liabilities and stockholders' equity $ 3,253,058 $ 4,189,842
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
-1-
<PAGE> 4
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Three Months Ended 1984) to
March 31, March 31,
1998 --------- 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales $ -- $ 303 $ 194,319
Interest 29,297 14,610 486,551
Other income 100 -- 119,900
------------- ------------- -------------
29,397 14,913 800,770
------------- ------------- -------------
Costs and Expenses:
Research and development 170,146 70,214 2,094,157
General and administrative 505,414 326,985 6,400,324
Depreciation and amortization 176,427 5,719 486,269
Interest 275,248 233,370 1,911,124
------------- ------------- -------------
1,127,235 636,288 10,891,874
------------- ------------- -------------
Net Loss $ (1,097,838) $ (621,375) $ (10,091,104)
============= ============= =============
Net Loss Per Common Share $ (.00) $ (.00)
============= =============
Weighted Average Number of 281,039,791 267,381,641
Common Shares Outstanding ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
-2-
<PAGE> 5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
Adjustment for pooling of interests - (1,000) 1,000 -
----------- ------- -------- --------
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- ------- -------- --------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- ------- -------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- ------- -------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ------- -------- --------
</TABLE>
See notes to consolidated condensed financial statements.
-3-
<PAGE> 6
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, period ended December 31, 1987 - - - (258,663)
----------- ------- --------- ----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
----------- ------- --------- ----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
----------- ------- --------- ----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 -
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 -
Issuance of common stock, exercise of "C" warrants .08 12,900 - 1,032 -
Net loss, year ended December 31, 1990 - - - (267,867)
----------- ------- --------- ----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ------- --------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
-4-
<PAGE> 7
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $2,003 $1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants .08 2,500 -- 200 --
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
----------- ------ ---------- ------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
----------- ------ ---------- ------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 --
Issuance of common stock, for testing .035 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
----------- ------ ---------- ------------
Balance, December 31, 1993 $236,276,991 $2,363 $3,416,070 $ (2,854,076)
----------- ------ ---------- ------------
</TABLE>
See notes to consolidated condensed financial statements.
-5-
<PAGE> 8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $2,363 $3,416,070 $ - $(2,854,076) $ -
Issuance of common stock, for consulting services $.05 4,750,000 47 237,453 - - -
Issuance of common stock, exercise of options .08 400,000 4 31,996 - - -
Issuance of common stock, exercise of options .10 190,000 2 18,998 - - -
Net loss, year ended December 31, 1994 - - - - (440,837) -
----------- ------ ---------- --- ----------- ---
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
-
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 - - -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 - - -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 - - -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 - - -
Issuance of common stock, for consulting services .14 300,000 3 41,997 - - -
Net loss, year ended December 31, 1995 - - - - (401,884) -
----------- ------ ---------- --- ----------- ---
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
----------- ------ ---------- --- ----------- ---
</TABLE>
See notes to consolidated condensed financial statements.
-6-
<PAGE> 9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options .05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options .11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options .19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options .20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered .50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
----------- ------ ---------- ----------- ----------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------ ---------- ----------- ----------- --------
</TABLE>
See notes to consolidated condensed financial statements.
-7-
<PAGE> 10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock, exercise of options .08 3,333,333 33 247,633 - - -
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984 - - -
Issuance of common stock, conversion of debt .15 894,526 9 133,991 - - -
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977 - - -
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982 - - -
Issuance of common stock, conversion of debt .16 772,201 8 119,992 - - -
Issuance of common stock, for services rendered .41 50,000 - 20,500 - - -
Issuance of common stock, for services rendered .24 100,000 1 23,999 - - -
Beneficial conversion feature, February debenture - - 413,793 - - -
Beneficial conversion feature, October debenture - - 1,350,000 - - -
Warrant costs, February debenture - - 37,242 - - -
Warrant costs, October debenture - - 291,555 - - -
Amortization of deferred compensation cost - - - - - 399,322
Imputed interest on convertible debenture - - 4,768 - - -
Net loss, year ended December 31, 1997 - - - - (4,141,729) -
----------- ------- ----------- --------- ----------- ----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------- ----------- --------- ----------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
-8-
<PAGE> 11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock, exercise of options .12 295,000 3 35,397 - - -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 - - -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 - - -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 - - -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 - - -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 - - -
Amortization of deferred compensation cost - - - - - 14,767
Net loss, three months ended March 31, 1998 - - - - (1,097,838) -
----------- ------ ----------- --------- ------------ ---------
Balance, March 31, 1998 290,271,443 $2,902 $12,533,044 $ (19,000) $(10,091,104) $ (59,070)
=========== ====== =========== ========= ============ =========
</TABLE>
See notes to consolidated condensed financial statements.
-9-
<PAGE> 12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
Three Months Ended (February 20,
March 31, 1984) to
--------- March 31,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,097,838) $ (621,375) $(10,091,104)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 176,427 6,029 493,567
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 210,951 233,060 1,763,793
Amortization of deferred compensation cost 14,767 96,139 701,430
Loss on sale of property and equipment -- -- 1,425
Issuance of common stock for services -- 20,500 1,416,500
Imputed interest on convertible debenture -- -- 4,768
Changes in Operating Assets and Liabilities:
Increase in other current assets (9,744) (24,371) (29,984)
Increase in inventory -- -- (19,729)
Increase in other assets (33,267) (154,395) (562,937)
Increase (decrease) in accounts (107,363) (9,135) 274,443
payable and accrued liabilities
Decrease in customers deposits -- -- (7,800)
------------ ------------ ------------
Total adjustments 251,771 167,827 4,035,476
------------ ------------ ------------
Net cash used by operating activities (846,067) (453,548) (6,055,628)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments (94,000) -- (5,471,932)
Proceeds from sale of investments 2,512,902 618,647 4,905,932
Expenditures for property and equipment (108,613) (32,837) (800,479)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities 2,310,289 585,810 (1,365,279)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- 1,000,000 4,000,000
Proceeds from sale of securities, net of issuance costs 35,400 266,666 5,156,588
------------ ------------ ------------
Net cash provided by financing activities 35,400 1,266,666 9,156,588
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 1,499,622 1,398,928 1,735,681
------------
Cash and Cash Equivalents, Beginning 236,059 42,396 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 1,735,681 $ 1,441,324 $ 1,735,681
============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
-10-
<PAGE> 13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at March 31, 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of March 31, 1998 and
results of operations for the three months ended March 31, 1998 and
1997 and cash flows for the three months ended March 31, 1998 and
1997. All such adjustments are of a normal recurring nature. The
results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year. The
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1997.
NOTE 2. COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The accompanying unaudited consolidated condensed financial
statements at March 31, 1998 have been prepared in conformity with
generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has
suffered losses from operations during its operating history. The
Company is dependent upon registration of RETICULOSE for sale
before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA.
Management does not anticipate registration or other approval of
RETICULOSE in the near future in the United States. Unless and
until RETICULOSE is approved for sale in the United States or
another industrially developed country, the Company may be
dependent upon the continued sale of its securities and debt
financing for funds to meet its cash requirements. Management
intends to continue to sell the Company's securities in an attempt
to mitigate the effects of its cash position; however, no assurance
can be given that equity or debt financing, if and when required,
will be available. In the event that such equity or debt financing
is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. During
1997, the Company obtained debt financing and may seek additional
debt financing if the need arises. No assurance can be given that
the Company will be able to sustain its operations until FDA
approval is granted or that any approval will ever be granted.
These factors raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of RETICULOSE. The Company has not as yet
received any notice of claim from such parties.
-11-
<PAGE> 14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
PRODUCT LIABILITY
The Company could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is
unaware of any such claims or threatened claims since RETICULOSE
was initially marketed in the 1940's, one study noted adverse
reactions from highly concentrated doses in guinea pigs. In the
event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of RETICULOSE. As of the date
hereof, the Company does not have product liability insurance for
RETICULOSE. There can be no assurance that the Company will be able
to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
materially adversely affect the Company.
LACK OF PATENT PROTECTION
The Company does not presently have a patent for RETICULOSE but the
Company is currently applying for patents for RETICULOSE as a
treatment for certain diseases. The Company can give no assurance
that other companies, having greater economic resources, will not
be successful in developing a similar product. There can be no
assurance that such patents, if obtained, will be enforceable.
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using RETICULOSE incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through October 31,
1998 at an exercise price of $.14 and $.16, respectively. As of
March 31, 1998, there are outstanding Plata Options to acquire
518,000 shares at $.14 per share and Additional Plata Options to
acquire 858,100 shares at an exercise price of $.16 per share.
Through March 31, 1998, the Company has received approximately
$705,400 pursuant to the issuance of approximately 8 million shares
in connection with the exercise of the Plata Options and the
Additional Plata Options.
-12-
<PAGE> 15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
PLATA PARTNERS LIMITED PARTNERSHIP (Continued)
In April 1998, an additional 300,000 shares were issued in
connection with the exercise of Additional Plaza Options at $.14
per share.
TRM MANAGEMENT CORP. ("TRM")
In August 1991, the Company entered into an agreement with TRM,
whereby TRM would perform certain open human clinical trial tests
in Haiti using RETICULOSE (the "TRM Agreement"). According to the
TRM Agreement, the purpose of the Haiti tests was to assess the
effectiveness of RETICULOSE against the Hepatitis "A" virus and
Hepatitis "B" virus in accordance with and in compliance with a
certain Hepatitis Open Label Clinical Trial Protocol developed by
TRM. At the conclusion of the Haiti tests, TRM was required to
prepare a paper describing the methods and results of testing, the
form and substance of which shall be appropriate for publication by
recognized scientific journals ("Results Paper"). The Results Paper
was published in the December 1992 issue of the Journal of the
Royal Society of Health.
On January 3, 1992, TRM delivered to the Company the Results Paper.
In accordance with the terms of the TRM Agreement, the Company has
authorized the issuance to the shareholders and certain associated
persons of TRM (1) an aggregate amount of 10,000,000 shares of the
Company's common stock (the "TRM Shares") and (2) an option to
acquire, at any time, for a period of five years from the date of
issuance of the option, 10,000,000 shares of the Company's common
stock at a purchase price of $.05 and $.08 per share (the "TRM
Options"). As of March 31, 1998, 10,000,000 shares of common stock
were issued pursuant to the exercise of the TRM Options for an
aggregate exercise price of $600,000.
ARGENTINE AGREEMENT
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug RETICULOSE on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50. The Clinical
Trials did not include a placebo control group or references to any
other antiviral drug.
-13-
<PAGE> 16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, the Written Report was delivered by
Dr. Flichman to the Company. Upon delivery of the Written Report to
the Company, the Company delivered to the principals of DCT options
to acquire 2,000,000 shares of the Company's common stock for a
period of one year from the date of the delivery of the Written
Report, at a purchase price of $.20 per share. Pursuant to several
amendments, the DCT options are exercisable through October 31,
1998 at an exercise price of $.21 per share. As of March 31, 1998,
473,500 shares of common stock were issued pursuant to the exercise
of these options for an aggregate exercise price of approximately
$95,000.
Additionally, in April 1998, 10,000 shares were issued in
connection with the exercise of options at $.20 per share.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of RETICULOSE for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $550,000 which is accounted for as a research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
RETICULOSE for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
-14-
<PAGE> 17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $128,000, respectively such expenses are
accounted for a research and development expenses. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts respectively
expended in connection with the Studies.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $94,950 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
RETICULOSE for the treatment of rheumatoid arthritis in humans.
BARBADOS STUDY
A double blind study assessing the efficacy of the Company's drug
RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of March 31, 1998, the Company has
expended approximately $355,000 to cover the costs of the Barbados
Study. Based on information received from the coordinators of the
Barbados Study, the Company is uncertain as to the costs to be
incurred in connection with the Barbados Study and has not been
informed as to when results from the Barbados Study will be
forthcoming. In December 1996, the Company received from the
coordinators of the Barbados Study, a written summary of
preliminary results of the Barbados Study (the "Written Summary").
NATIONAL CANCER INSTITUTE AGREEMENT
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which RETICULOSE affects the transcription of the gamma interferon
gene.
TOPICAL SAFETY STUDY
As of March 31, 1998, the Company advanced approximately $130,000
towards a total of $150,000 for a topical safety study to be
conducted in the United States for the topical use of RETICULOSE
for the treatment of HPV and herpes.
-15-
<PAGE> 18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of March 31, 1998, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 1999 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 1997 and ending March 23, 1999 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 1999 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of March 31, 1998, 500,000 shares of common stock were
issued pursuant to the exercise of stock options by Richard Rubin.
Mr. Rubin has, from time to time in the past, advised the Company
on matters unrelated to his consultation with Dr. Hirschman.
-16-
<PAGE> 19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $19,500,000 at $.27 and 500,000 at $.36).
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
do not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
COHEN AGREEMENTS
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through October 31, 1998), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per share (which exercise price has been increased to $.15 per
share) (the "September 1992 Cohen Options"). As of March 31, 1998,
1,300,000 of the September 1992 Cohen Options have been exercised
for cash consideration of $156,000.
-17-
<PAGE> 20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). The Company has been informed that
Messrs. Cohen, Bauer and Rizzuto are principals of a firm which has
been granted certain distribution rights, which were terminated on
May 31, 1995. Through March 31, 1998, 2,855,000 shares were issued
pursuant to the exercise of the Bauer and Rizzuto Options for an
aggregate exercise price of $285,500. Mr. Rizzuto sold all of his
shares and all shares underlying his options. Pursuant to several
amendments, the remaining Bauer options are exercisable through
October 31, 1998 at an option price of $.13. The Company agreed to
issue to Cohen an additional 300,000 shares in 1995 at a time when
the shares were valued at $.14 per share, in consideration for
expenditures incurred by Mr. Cohen in connection with securing for
the benefit of the Company and the affiliated distributor, the
continued services of a doctor.
The issuance of the September 1992 Cohen Shares, the February 1993
Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
Shares have been accounted for as an administrative expense in the
amount of the Company's valuation of such shares as of the issuance
date. During the year ended December 31, 1996, Mr. Cohen was issued
300,000 shares for services rendered. These shares were accounted
for as an administrative expense in the amount of the Company's
valuation of such shares as of the issuance date.
-18-
<PAGE> 21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute RETICULOSE in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause RETICULOSE to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of RETICULOSE
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. No sales have been made by the
Company under the distribution agreements other than for testing
purposes.
Additionally, pursuant to one of the distributions agreements, the
Company granted the distributor the right to acquire 3,000,000 shares
of the Company's common stock at a purchase price of $.25 (which has
been increased to $.26) upon the completion of certain tests and the
publication of a paper with respect to such tests.
NOTE 3. CONVERTIBLE DEBENTURES
On February 21, 1997, in order to finance research and development, the
Company sold $1,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "February Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB"). Accrued interest under the February
Debenture is payable semi-annually, computed at the rate of 7% per
annum on the unpaid principal balance from February 21, 1997 until the
date of interest payment. The February Debenture may be prepaid by the
Company before maturity, in whole or in part, without premium or
penalty, if the Company gives the holder of the Debenture notice not
less than 30 days before the date fixed for prepayment in that notice.
The February Debenture is convertible, at the option of the holder,
into shares of common stock.
The assured incremental yield on the February Debenture was measured
based on the date of issuance of the security and amortized to interest
expense over the conversion period which ended on May 29, 1997 which
was the first date full conversion could occur. The interest expense
relating to this measurement was $4,768.
During the quarter ended June 30, 1997, RBB exercised its right to
convert $330,000 of the principal amount of the February Debenture into
1,648,352 shares of the Company's common stock at a conversion price of
$.2002 per share and to convert $134,000 of the principal amount of the
debenture into 894,526 shares of the Company's common stock at a
conversion price of $.1498.
-19-
<PAGE> 22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
During the quarter ended September 30, 1997, RBB exercised its right to
convert $270,000 of the principal amount of the February Debenture into
2,323,580 shares of the Company's common stock at a conversion price of
$.1162 per share and to convert $266,000 of the principal amount of the
debenture into 1,809,524 shares of the Company's common stock at a
conversion price of $.1470 per share.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February warrants") to purchase
common stock, each such February warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black Sholes Pricing Model. This amount has been
reflected in the accompanying financial statements as interest expense
related to the convertible debenture.
Based on the terms for conversion associated with the February
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $413,793. This amount has been fully amortized to
interest expense with a corresponding credit to additional paid-in
capital.
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7%
Convertible Debenture (the "October Debenture") due August 30, 2007, to
RBB. Accrued interest under the October Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the October
Debenture until the date of interest payment. The October Debenture may
be prepaid by the Company before maturity, in whole or in part, without
premium or penalty, if the Company gives the holder of the Debenture
notice not less than 30 days before the date fixed for prepayment in
that notice . The October Debenture is convertible, at the option of
the holder, into shares of common stock.
During the quarter ended December 31, 1997, RBB exercised its right to
convert $120,000 of the principal amount of the October Debenture into
772,201 shares of the Company's common stock at a conversion price of
$.1554 per share.
During January 1998, RBB exercised its right to convert $133,000 and
$341,250 of the principal amount of the October debenture into
1,016,043 and 2,512,887 shares of the Company's common stock at a
conversion price of $.1309 and $.1358 per share, respectively.
On February 26, 1998 and March 19, 1998, RBB exercised its right to
convert $750,000 and $335,750 of the principal amount of the October
Debenture into 5,114,175 and 1,498,884 shares of the Company's common
stock at a conversion price of $.14665 and $.224 per share,
respectively.
-20-
<PAGE> 23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
On March 31, 1998, RBB exercised its right to convert $425,000 of the
principal amount of the October Debenture into 1,870,869 shares of the
Company's common stock at a conversion price of $.2299 per share.
In May 1998, RBB exercised its right to covert $275,000 of the
principal amount of the October Debenture into 11,491,485 shares of the
Company's common stock at a conversion price of $.18438 per share.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October warrants") to purchase
Common Stock, each such October warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black Sholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized to interest expense
over the expected term of the notes which at December 31, 1997 was 120
months.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture liability with a corresponding credit to
additional paid-in capital and is being amortized to interest expense
over the period from October 8, 1997 (date of debenture) to February
24, 1998 (date the debenture is fully convertible). The interest
expense relative to this item was $1,139,049 for 1997 and $210,951
during the quarter ended March 31,1998.
<TABLE>
<S> <C>
Unpaid principal balance of October debenture $895,000
Less unamortized discount 276,957
--------
Convertible debenture, net $618,043
========
</TABLE>
-21-
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, the related Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 and the Consolidated Condensed
Financial Statements and the related Notes to Consolidated Condensed Financial
Statements included in Item 1 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 1998 and March 31, 1997,
the Company incurred losses of $1,097,838 ($0.00 per share) and $621,375 ($0.00
per share). The Company's increased losses during 1998 are principally due to
increased general and administrative expense ($505,414 for the three months
ended March 31, 1998 vs. $326,838 for the three months ended March 31, 1997)
primarily resulting from the employment of additional research professionals and
rent and operating costs associated with the Yonkers, New York office and
laboratory; amortization of loan costs related to the October Debenture
(discussed below) included in depreciation and amortization ($153,611 for the
three months ended March 31, 1998 vs. $0 for the three months ended March 31,
1997); and increased research and development expense (approximately $170,146
for the three months ended March 31, 1998 vs. approximately $70,214 for the
three months ended March 31, 1997). Administrative expenses and the lack of
sales revenues also contribute to the Company's losses.
There were sales of $0 and $303, respectively, during the three month
periods ended March 31, 1998 and March 31, 1997. All sales during these periods
resulted from distributors purchasing RETICULOSE for testing purposes. Interest
income was $29,297 and $14,610 for the three month periods ended March 31, 1998
and March 31, 1997.
Although there can be no assurance of the amount of sales, if any, the
Company believes that it will generate sales revenue at least with respect to
testing of RETICULOSE pursuant to its agreements with exclusive distributors
from initial testing in their respective territories. However, there will be no
likelihood of significant sales of RETICULOSE unless and until requisite
approvals are obtained in such territories.
LIQUIDITY
As of March 31, 1998, and December 31, 1997, the Company had current
liquid assets (cash and cash equivalents and investments) of $2,301,681 and
$3,220,961, respectively. As of March 31, 1998, and December 31, 1997, the
Company had total assets of $3,253,058 and $4,189,842, respectively. The
decrease in liquid assets and total assets was primarily attributable to the
increased expenditures for research and development and increased general and
administrative expenses
22
<PAGE> 25
(including rent and payroll). See "--Capital Resources."
During the three month period ended March 31, 1998, the Company
expended approximately $108,000 for leasehold improvements and furniture and
equipment at the Company's Yonkers, New York office.
Until RETICULOSE is registered for sale, sales of RETICULOSE are not
expected to generate significant revenues. There can be no assurances that
RETICULOSE will be available for sale or, even if available, that it would
generate significant revenues. FDA approval to begin human clinical trials will
require significant cash expenditures, the amount of which is not currently
determinable. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED CORRESPONDENCE FROM
THE FOOD AND DRUG ADMINISTRATION OF THE UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES (THE "FDA"), WHICH STATED, AMONG OTHER COMMENTS, THAT THE
COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE TO
THE FDA'S EARLIER REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE
COMPANY'S NOTICE OF CLAIMED INVESTIGATIONAL EXEMPTION FOR A NEW DRUG SUBMITTED
TO THE FDA ON SEPTEMBER 20, 1984 WAS "INACTIVATED." The Company has taken no
action with regard to deficiency letters received by it from the FDA.
If the Company does not begin to generate revenues from the sale of
RETICULOSE, and if the Company does not receive significant funds from the
exercise of additional options, it shall be dependent upon additional debt
and/or equity financing, of which there can be no assurance, or it must reduce
expenses or further limit operations.
CAPITAL RESOURCES
The Company in the past has been dependent upon sales of shares of its
Common Stock, $.00001 par value (the "Common Stock"), and upon the exercise of
its warrants issued in the Company's initial public offering in 1986, all of
which have expired and, since the expiration of the warrants, the Company has
been dependent upon the proceeds from the continued exercise of outstanding
options for the funds required to continue operations at present levels and to
fund the planned Research and Development and Clinical Trials and Testing of
RETICULOSE.
On February 21, 1997, in order to finance research and development, the
Company sold $1,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "February Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB") in an offshore transaction pursuant to Regulation S
under the Securities Act of 1933, as amended. Accrued interest under the
February Debenture is payable semiannually, computed at the rate of 7% per annum
on the unpaid principal balance from February 21, 1997 until the date of
interest payment. (After default, interest accrues at 10% per annum.) The
February Debenture may be prepaid by the Company before maturity, in whole or in
part, without premium or penalty, if the Company gives the holder of the
February Debenture notice not less than 30 days before the date fixed for
prepayment in that notice
23
<PAGE> 26
(prepayment applied first to pay interest and then to principal then
outstanding). The February Debenture is convertible, at the option of the
holder, into shares of Common Stock pursuant to the following formula: Upon
receipt by the holder of the February Debenture of the Company's notice of
prepayment of the February Debenture, in whole or in part, and otherwise in
accordance with the schedule stated in the last sentence of this paragraph, the
outstanding principal amount of the February Debenture is convertible into such
number of shares of Common Stock as shall equal the quotient obtained by
dividing (x) the principal amount of the February Debenture by (y) the
Applicable Conversion Price; provided, however, that the right to convert
outstanding principal of the February Debenture terminates at the close of
business on the third calendar day preceding the date fixed for prepayment of
the February Debenture in the Company's notice of prepayment, unless the Company
defaults in making such prepayment. For this purpose, the term "Applicable
Conversion Price" means the lesser of (q) $0.3432 and (r) the product obtained
by multiplying the Average Closing Price by 0.70; and the "Average Closing
Price" with respect to any conversion elected to be made by the holder of the
February Debenture shall be the average of the daily closing prices for the five
consecutive trading days ended on the trading day immediately preceding the date
on which the holder gives the Company a written notice of the holder's election
to convert outstanding principal of the February Debenture. The closing price on
any trading day shall be (a) if the Common Stock is then listed or quoted on
either the National Association of Securities Dealers, Inc.'s OTC Bulletin
Board, The Nasdaq SmallCap Market or The Nasdaq National Market, the reported
closing bid price for the Common Stock on such day or (b) if the Common Stock is
listed on either the American Stock Exchange or New York Stock Exchange, the
last reported sales price for the Common Stock on such exchange on such day. The
February Debenture is not convertible until April 14, 1997, is convertible only
to the extent of $333,333 from April 15, 1997 through April 29, 1997, is
convertible only to the extent of $666,667 (less any amount previously
converted) from April 30, 1997 through May 29, 1997, and is fully convertible
after May 29, 1997. On April 22, 1997, June 6, 1997, July 3, 1997 and August 20,
1997, pursuant to notice by the holder, RBB, to the Company under the February
Debenture, $330,000, $134,000, $270,000 and $266,000 of the principal amount of
the February Debenture was converted into 1,648,352, 894,526, 2,323,580 and
1,809,524 shares of the Common Stock. As of August 20, 1997 the February
Debenture was fully converted.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "Warrants") to purchase Common Stock, each
such Warrant entitling the holder to purchase, from February 21, 1997 through
February 28, 2007, 178,378 shares of the Common Stock. The exercise prices of
the three Warrants are $0.288, $0.576 and $0.864 per Warrant share,
respectively. Each Warrant provides that the holder may elect to receive a
reduced number of shares of Common Stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that Warrant as the excess of the market value of shares of
Common Stock over the warrant exercise price bears to that market value. Each
Warrant contains anti-dilution provisions which provide for the adjustment of
Warrant price and Warrant shares as more particularly set forth therein.
Based on the terms for conversion associated with the February
Debenture, there is an
24
<PAGE> 27
intrinsic value associated with the beneficial conversion feature of $413,793.
This amount has been fully amortized to interest expense with a corresponding
credit to additional paid-in capital.
Under an agreement approved by the Board of Directors of the Company in
December 1996, the Company retained Interfi Capital Group, Inc. ("Interfi"), a
firm unaffiliated with the Company, to arrange financing for the Company for a
fee. In connection with issuance by the Company of the February Debenture, the
Company paid to Interfi the sum of $70,000.
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "October Debenture") due August 30, 2007, to RBB in an offshore
transaction pursuant to Regulation S under the Securities Act of 1933, as
amended. Accrued interest under the October Debenture is payable semiannually,
computed at the rate of 7% per annum on the unpaid principal balance from the
date of the issuance of the October Debenture until the date of interest
payment. (After default, interest accrues at 10% per annum.) The October
Debenture may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the Debenture
notice not less than 30 days before the date fixed for prepayment in that notice
(prepayment applied first to pay interest and then to principal then
outstanding). The October Debenture is convertible, at the option of the holder,
into shares of Common Stock pursuant to the following formula: Upon receipt by
the holder of the October Debenture of the Company's notice of prepayment of the
Debenture, in whole or in part, and otherwise in accordance with the schedule
stated in the last sentence of this paragraph, the outstanding principal amount
of the Debenture is convertible into such number of shares of Common Stock as
shall equal the quotient obtained by dividing (x) the principal amount of the
Debenture by (y) the Applicable Conversion Price; provided, however, that the
right to convert outstanding principal of the Debenture terminates at the close
of business on the third calendar day preceding the date fixed for prepayment of
the Debenture in the Company's notice of prepayment, unless the Company defaults
in making such prepayment. For this purpose, the term "Applicable Conversion
Price" means the lesser of (q) $0.26 and (r) the product obtained by multiplying
the Average Closing Price by 0.70; and the "Average Closing Price" with respect
to any conversion elected to be made by the holder of the October Debenture
shall be the average of the daily closing prices for the five consecutive
trading days ended on the trading day immediately preceding the date on which
the holder gives the Company a written notice of the holder's election to
convert outstanding principal of the Debenture. The closing price on any trading
day shall be (a) if the Common Stock is then listed or quoted on either the
National Association of Securities Dealers, Inc.'s OTC Bulletin Board, The
Nasdaq SmallCap Market or The Nasdaq National Market, the reported closing bid
price for the Common Stock on such day or (b) if the Common Stock is listed on
either the American Stock Exchange or New York Stock Exchange, the last reported
sales price for the Common Stock on such exchange on such day. The Debenture is
fully convertible, pursuant to notice by the holder, RBB, to the Company.
The October Debenture is not convertible until November 26, 1997, is
convertible only to the extent of $750,000 from November 26, 1997 through
December 26, 1997, is convertible only to the extent of $1,500,000 (less any
amounts previously converted) from December 26, 1997
25
<PAGE> 28
through January 25, 1998 and is convertible only to the extent of $2,250,000
(less any amounts previously converted) from January 25, 1998 through February
24, 1998 and is fully convertible after February 24, 1998. In connection with
the issuance by the Company of the October Debenture, the Company paid to
Interfi the sum of $210,000. As of March 31, 1998, $895,000 of the October
Debenture had not yet been converted by RBB.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "Warrants") to purchase Common Stock, each
such Warrant entitling the holder to purchase, from the date of grant through
August 30, 2007, 600,000 shares of the Common Stock. The exercise prices of the
three Warrants are $0.20, $0.23 and $0.27 per Warrant share, respectively. Each
Warrant provides that the holder may elect to receive a reduced number of shares
of Common Stock on the basis of a cashless exercise; that number of shares bears
the same proportion to the total number shares issuable under that Warrant as
the excess of the market value of shares of Common Stock over the warrant
exercise price bears to that market value. Each Warrant contains anti-dilution
provisions which provide for the adjustment of Warrant price and Warrant shares
as more particularly set forth therein.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial conversion
feature of $1,350,000. This amount has been amortized to interest expense with a
corresponding credit to additional paid-in capital.
If the FDA or other approvals are obtained, of which there can be no
assurance, funds must be budgeted by the Company from the exercise of options
and the Warrants, potential grants and/or additional equity, the availability of
which funds there can be no assurance.
The Company is currently expending approximately $250,000 per month,
which expenses include salaries, rent, professional fees, license fees and
taxes, research and development, and travel, principally between the Company's
two offices and its Bahamian facility, and anticipates that it can continue
operations for at least nine months with its current liquid assets, if no Common
Stock purchase options or Warrants are exercised. If all of the outstanding
options are exercised, the Company will receive net proceeds of approximately
$6,660,510. Those proceeds will contribute to general and administrative and
working capital and will permit the Company to substantially increase its budget
for research and development and clinical trials and testing and to operate at
significantly increased levels of operation, assuming RETICULOSE receives
approvals and prospects for sales increase to justify such increased levels of
operation, of which there can be no assurance. However, there can be no
assurance that any additional options will be exercised. The recent prevailing
market price for shares of Common Stock has been above the exercise prices of
certain of the outstanding options. However, there can be no assurance that the
recent trading levels will be sustained or that any additional options will be
exercised. In the event that less than 25% or none of the outstanding options
are exercised, and no other additional financing is obtained by the Company, in
order for the Company to achieve the level of operations contemplated by
management, management anticipates that it will have to limit
26
<PAGE> 29
intentions to expand operations beyond current levels which involve expenditures
of $250,000 per month. The Company is currently seeking debt financing,
licensing agreements, joint ventures and other sources of financing. There can
be no assurance that such additional sources of financing will be found. There
can be no assurance that any of the Company's distributors will ever obtain
regulatory approvals to test or market RETICULOSE in any territory. In the event
that financing is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. Management does not
believe that, at present, debt or equity financing will be readily obtainable on
favorable terms unless and until FDA approval for Phase I clinical testing is
granted or comparable approval is obtained from another developed or developing
country. Because of the uncertainties involved in the process of gaining
approval for commercial drug use on humans, no assurance can be given that the
Company will be able to sell RETICULOSE. For a discussion of the risk of
relocation of the manufacturing facility of the Company's subsidiary, see "--
Liquidity."
The Company does not have a patent for RETICULOSE, although
applications for United States patents have been filed on behalf of the Company
and others are contemplated to be filed. There can be no assurance that other
companies, having greater economic resources, will not be successful in
developing a similar product using processes similar to those of the Company.
There can be no assurance that the Company will obtain such a patent or, if
obtained, that it will be enforceable. The Company has retained patent counsel
for the purpose of pursuing additional patent protection for RETICULOSE.
However, there is no certainty that patents will be granted, or if granted, that
the patents will be sustained if judicially attacked, and, if declared valid,
that the patents, in fact, will operate to protect the Company from others
copying RETICULOSE. The Company has relied upon laws protecting proprietary
information and trade secrets and upon confidentiality agreements to protect its
rights to RETICULOSE and the processes for its manufacture, but there can be no
assurance that such efforts and procedures will continue to be successful and
protect the Company from any competition in the future.
27
<PAGE> 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in minor litigation, none of which is
considered by management to be material to its business or, if adversely
determined, would have a material adverse effect on the Company's financial
condition.
Item 2. Changes in Securities and Use of Proceeds
During January 1998, RBB exercised its right to convert $133,000 and
$341,250 of the principal amount of the October Debenture into 1,016,043 and
2,512,887 shares of the Company's common stock at a conversion price of$.1309
and $.1358 per share, respectively. On February 26, 1998 and March 19, 1998, RBB
exercised its right to convert $750,000 and $335,750 of the principal amount of
the October Debenture into 5,114,175 and 1,498,884 shares of the Company's
common stock at a conversion price of $.14665 and $.224 per share, respectively.
On March 31, 1998, RBB exercise its right to convert $425,000 of the principal
amount of the October Debenture into 1,870,869 shares of the Company's common
stock at a conversion price of $.2229 per share.
During the three months ended March 31, 1998, 295,000 options granted
to Plata Partners Limited Partnership (the "Plata Options") were exercised at
$.12 per share for a total of $35,400.
In addition, during the three months ended March 31, 1998:
(i) the Company amended the terms of certain options granted to Plata
Partners Limited Partnership (the "Plata Options" and the "Additional
Plata Options"), whereby the Company offered and the holders of the
Plata Options and the Additional Plata Options accepted offers to
further extend the exercise date of the Plata Options and the
Additional Plata Options through October 31, 1998 in consideration for
an increase in the exercise price to $.14 per option share as to the
Plata Options and $.16 per option share as to the Additional Plata
Options;
(ii) the Company amended the terms of certain options granted to DCT
S.R.L. (the "DCT Options"), whereby the Company offered and the holders
of the DCT Options accepted offers to further extend the exercise date
of the DCT Options through October 31, 1998 in consideration for an
increase in the exercise price to $.21 per option share;
(iii) the Company amended the terms of certain options granted to
Commonwealth Pharmaceuticals (the "Commonwealth Options") to increase
the exercise price to $.26 per option share;
(iv) the Company amended the terms of certain options granted to
Leonard Cohen (the "September 1992 Cohen Options"), whereby the Company
offered and Mr.
28
<PAGE> 31
Cohen accepted an offer to further extend the exercise date of the
September 1992 Cohen Options through October 31, 1998 in consideration
for an increase in the exercise price to $.15 per option share; and
(v) the Company amended the terms of certain options granted to Elliot
Bauer (the "Bauer Options"), whereby the Company offered and Mr. Bauer
accepted an offer to further extend the exercise date of the Bauer
Options through October 31, 1998 in consideration for an increase in
the exercise price to $.13 per option share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the first quarter ended March 31, 1998, no matters were
submitted to a vote of security holders of the Company, through the solicitation
of proxies or otherwise.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K.
During the three-month period ending March 31, 1998, no
Current Reports on Form 8-K were filed.
29
<PAGE> 32
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: May 13, 1998 By: /s/ William Bregman
-----------------------------------
William Bregman,
Duly Authorized Officer
and Principal Financial
and Accounting Officer
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
FIRST QUARTER 10-Q OF ADVANCED VIRAL RESEARCH CORP. FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,735,681
<SECURITIES> 566,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 2,351,394
<PP&E> 796,963
<DEPRECIATION> 218,206
<TOTAL-ASSETS> 3,253,058
<CURRENT-LIABILITIES> 268,243
<BONDS> 0
0
0
<COMMON> 2,902
<OTHER-SE> 2,363,870
<TOTAL-LIABILITY-AND-EQUITY> 3,253,058
<SALES> 0
<TOTAL-REVENUES> 29,397
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 851,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275,248
<INCOME-PRETAX> (1,097,838)
<INCOME-TAX> (1,097,838)
<INCOME-CONTINUING> (1,097,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,097,838)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
